Further Delays on NAMA

When the NAMA bill was being debated in the Dail last Autumn, the public was regularly told that the plan was to have the first tranche of loans transferred by the end of last year. Today’s Sunday Business Post reports that further delays are now expected due to delays in preparations at the banks and due to the absence of clearance from the European Commission. The story reports that a verdict from the Commission may not come until the end of February at the earliest.

Stories such as this and this from the today’s Sunday Tribune also make it clear that it is going to be very difficult to attract private funds to the banks. At this point, it is perhaps a legitimate question to ask whether events have not overtaken the whole NAMA-Long-Term-Economic-Value strategy to keep the banks out of some form of temporary nationalisation.

Globalised Ireland

The Irish Times and other media today carried a report on the publication of a new globalisation index produced by Ernst & Young which places Ireland third on the globalised states list. The EY index joins an increasingly crowded field, so what follows is a bluffer’s guide to globalisation indices. As always, a good starting point (but never more than that) is the relevant Wikipedia entry.
Continue reading “Globalised Ireland”

External Imbalances and Fiscal Policy

In this new IIIS Discussion Paper, I discuss the potential role of fiscal policy in stabilising the external account.  The main focus is on the management of imbalances within the euro area; I pay particular attention to the Irish situation.

You can download the paper here.

Civil Servant U-Turn Explanations Getting Worse

I noted a few days ago that the government’s justification for the U-turn on pay cuts for senior civil servants was to cite the international benchmarking carried out for the Review Body report that recommended the cuts in the first place. This seemed an unsatisfactory defence of this controversial decision.

Yesterday in the Dail, the Tanaiste put forward a new justification for the decision (link to Dail transcript here). The Tanaiste said “With regard to the pay and conditions of assistant secretaries, the review body on higher level pay indicated that the bonus was indicatively part of their salary.”

If I understand the argument correctly, the Tanaiste is saying that the Review Body’s report indicated that the salary that it was recommending be cut included the bonuses, in which case the government was not actually implementing the report’s recommendations in the first place but that policy was now consistent with the report because of the U-turn.

Well, here’s the Review Body’s report. It’s not that long and I’ve read it a couple of times. And as far as I can see, the Tanaiste’s claim is, well (… looking for polite term for it) not correct. I can’t find anywhere in the report where it says that the bonus was explicitly, implicitly, or, indeed, indicatively included in the baseline salary recommended to be cut.

In fact, there’s pretty solid evidence that the Review Body was explicitly excluding bonuses from the salaries being considered: The “current rate” salaries cited on page 5 of the report are base salaries excluding bonuses. This doesn’t seem to leave much room for the idea that the Review Body was including bonuses as part of the salary to be cut, whether indicatively or otherwise.

Is it really too much to ask for a for a simple and honest explanation for this decision, i.e. one that doesn’t rely on misrepresenting the report that recommended the cuts in the first place?

The ESRI’s Quarterly Economic Commentary

The ESRI’s Quarterly Economic Commentary (QEC) by Alan Barrett, Ide Kearney, Jean Goggin and Thomas Conefrey, published in December, is now available to download free of charge from the ESRI’s web site here. This QEC contained a number of pieces of research which may be of general interest.

1. Measuring Fiscal Stance

In box 1, entitled “Measuring Fiscal Stance”, the stance of fiscal policy in every year since 1976 is analysed within a consistent modelling framework. This research shows that the 2010 budget, while definitely contractionary, was actually not one of the toughest budgets of the last half century. That “accolade” goes to the 1976 budget, with fiscal policy in 1983 and 1984 and in 1988 and 1989 coming in next in line. After that comes the series of budgets implemented for 2009 and 2010. However as is noted in the box, a futher contractionary budget is planned for 2011 so the cumulative contraction in these years may well ultimately exceed the cumulative contraction in the late 1980s.

This measure is obtained by running the HERMES model with taxation and welfare rates indexed and certain rules on public expenditure. This “budget” is taken to be neutral – generally under this rule the relative size of the public sector in the economy would change little in the long term. This result is compared with the actual outturn with the difference being attributable to discretionary fiscal policy.

This measure of fiscal stance tells us whether a particular budget is deflationary or inflationary. It does not tell us whether it is appropriate. However, as discussed in the box, more often than not the stance has been inappropriate – i.e. procyclical.

While not discussed in the QEC, I think that it is interesting that the day of the budget the Department of Finance published an alternative measure for 2010 using the EU standard methodology. This actually suggested that the budget for this year was stimulatory. This strange outcome arises from the inappropriate nature of the EU methodology. The Department of Finance understandably did not draw attention to this result as they clearly saw that it was not a sensible approach. This problem with the EU methodology is not unique to Ireland but affects its application to other EU member economies under current circumstances. I think that the EU approach was not designed to deal with a crisis of the kind experienced in Europe over the last two years. This issue merits further research to find a more robust approach which can be applied in a consistent way to different Euro area economies.

2. The Balance of Payments and the Flow of Funds

In box 4, entitled “Balance of  Payments”, the implications of the economic forecasts for the capital side of the balance of payments is considered. With the government sector likely to borrow over 11% of GDP this year and with a prospective small balance of payments surplus, in 2010 the private sector will have a major net acquisition of financial assets abroad (more properly a repayment of net liabilities). Some of this repayment will not flow through the banking system. However, a significant part of it will affect the domestic banking system as households and companies increase savings or reduce borrowings from domestic banks. In turn, the banks are likely to reduce the size of their balance sheets and, hence, their net foreign liabilities. As shown in the box, there was a substantial reduction in these liabilities (largely to the ECB) in the second half of 2009. If this trend were to continue, with the prospective continuing large net repayment of foreign liabilities implied by the 2010 forecast, there should be a continuing substantial reduction in the banking system’s foreign exposure, especially in its exposure to the ECB. This will be important as the ECB begins to wind down its support for the Euro area financial system. Obviously this must be seen against the background of the government sector’s increasing foreign liabilities, a significant part of which will be needed to recapitalise the banking system this year.

3. Distributional Effects of Budgets

In Box 2 the distributional impact of tax and welfare policy changes in 2009 and 2010 was considered by Tim Callan, Claire Keane and John Walsh. They found that while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners. 

IPCC reform, now

After the leak of emails from the University of East Anglia showed global warming advocates apparently manipulating data and blackballing dissenting voices, now comes perhaps an even bigger scandal. This time, the discovery of serious scientific errors and accusations of conflicts of interests center on what was considered the gold standard of climate science: the Intergovernmental Panel on Climate Change (IPCC) and its chair Rajendra Pachauri.

When the latest IPCC report in 2007 claimed that global warming could lead to the melting of the Himalaya glaciers by 2035 and thus to major water shortages in the region, it generated headlines around the world. The sensationalist prediction now proved to be grossly in error, based entirely on nothing but speculation by one little-known scientist way back in 1999. Astoundingly, Mr. Pachauri’s initial reaction was to deny everything. Claiming that the IPCC does not make mistakes he first viciously attacked people who disagreed, calling the criticism of India’s Environment Minister Jairam Ramesh the stuff of “climate change deniers and school boy science”, before the sheer weight of evidence made him grudgingly admit the error. Another IPCC scientist, Georg Kaser, claims to have realized already in 2006 that the outlandish claim of melting glaciers was wrong, but could not get the IPCC to exclude the mistake from the report. the author, Murari Lal, admitted that “we thought that […] it will impact policy-makers and politicians and encourage them to take some concrete action.” In another example of the IPCC’s substandard scientific process, the panel claimed, based on a paper that was not peer-reviewed, that there has been an upward trend in the damage caused by weather-related disasters. At the same time, it ignored a peer-reviewed paper that showed the opposite, namely that there has been no such trend. Likewise, it failed to listen to reviewers of the IPCC report who had pointed out this error.

That such a large body of work as the IPCC report would contain some errors is unavoidable. But what’s striking in this example is the sheer lack of the most basic standards of scientific review that allowed the glacier and disaster claims to be incorporated. It also illustrates that the IPCC lacks any mechanisms to correct false or contested knowledge.

The whole situation became even more explosive when Richard North, a blogger at http://eureferendum.blogspot.com/, discovered that Mr. Pachauri’s institute, The Energy Research Institute (TERI), has built a sizeable research effort on the Himalayan meltdown claim, collecting large grants based on this IPCC blunder. TERI and Mr. Pachauri are also the beneficiaries of considerable sums from companies with a financial interest in climate policy, such as Pegasus Capital Advisors, Toyota and the Chicago Climate Exchange. Amazingly, it appears that Mr. Pachauri has not broken any IPCC code of conduct for the simple reason that there is no such code of conduct governing conflicts of interest for IPCC participants and leaders.

Mr. Pachauri’s reaction to what has been billed “Climategate” was equally politicized. When the leaked University of East Anglia emails revealed, among other things, the intent of IPCC authors to violate IPCC procedures by selectively excluding peer-review literature, Mr. Pachauri’s initial reaction was also to play down any wrongdoing. Only when the scandal attracted broader media coverage did he agree on an investigation, which he later cancelled though without giving any reason.

All this seems par for the course for an IPCC chair who in recent months has increasingly participated in overt political advocacy, such as when he called on people to eat less meat and on Washington to implement policies that cut U.S. CO2 emissions. Mr. Pachauri also endorsed what appears to be an arbitrary target of 350 parts per million for the atmospheric concentration of greenhouse gases, even though the IPCC itself has offered no such recommendation.

The IPCC has now started the preparations for the next major report, to be released in 2014. It may be advisable to pause for wholesale institutional reform. The IPCC was set up to advise policy makers on climate science with the stated goal to be “policy-relevant and yet policy-neutral, never policy-prescriptive.” Yvo de Boer, the executive secretary of the UN Framework Convention On Climate Change explained on January 21 that “the credibility of climate change policy can only be based on credible science.” The IPCC seeks to meet its rigorous standards of academic integrity through a thorough review process “to ensure an objective and complete assessment of current information.” The IPCC has fallen way short its own standards. An effective climate policy that is acceptable to the public must be based on sound and impartial advice from institutions that do their science sustainably over many decades. Partisan advice will be unpicked, sloppy research will be exposed.

The IPCC cannot continue its work without adopting strong ethical guidelines for its officials. Under normal conflict of interest rules as followed by other leading scientific advisory institutions, Mr. Pachauri would no longer be tolerable as the IPCC’s chairperson. Any proper IPCC reform would also have to include a formal mechanism to correct errors and more transparent procedures for the appointment of key personnel. Apart from adopting new rules, the IPCC won’t be able to regain its credibility without adhering to existing rules regarding the appointment of experts and the review of scientific material. What’s at stake is not just the reputation of the IPCC but the reputation of all of climate science.

Richard Tol, Economic and Social Research Institute, Dublin and Vrije Universiteit, Amsterdam
Roger Pielke Jr, University of Colorado at Boulder
Hans von Storch, GKSS Research Institute and Hamburg University
This piece was copy-edited by Daniel Schwammenthal

See also

Lal’s quote was copied from here: http://www.dailymail.co.uk/news/article-1245636/Glacier-scientists-says-knew-data-verified.html
He now claims he never said that: http://www.sciencenews.org/view/generic/id/55682/title/Indian_climatologist_disputes_charges_over_Himalayan_projection
David Rose says he did: http://dotearth.blogs.nytimes.com/2010/01/19/heat-over-faulty-un-view-of-asian-ice/

Pachauri explains himself here: http://www.sciencemag.org/cgi/content/full/327/5965/510/DC1

Standard and Poor’s on Anglo

My earlier post on Standard and Poor’s neglected to mention their comments on Anglo Irish Bank. The key passage is as follows:

Anglo has submitted a restructuring plan to the EC as a consequence of the state aid it has received from the Irish government. It has been reported that the management is proposing that Anglo is split up into a good bank and a bad bank. We anticipate that, if such a plan is approved by the EC, capital instruments such as lower Tier 2 may be left in the bad bank. Other options reportedly considered in the plan are liquidation and an orderly wind-down. Anglo’s plan is yet to be approved by the EC; we understand approval may occur in the first half of 2010.

I’d guess that these lower Tier 2 instruments (i.e. subordinated bonds) left in the Anglo “bad bank” (not to be confused with NAMA …) would end up being pretty worthless.

Resolutions and Bondholders, Again

The S&P downgrades make for depressing reading. I really don’t want to beat the drum again about the government over-promising in relation to what the establishment of a NAMA could deliver. Still, it’s interesting to note that the basic problems afflicting the Irish banks—loan losses, weak operating income and concerns that the banks will be undercapitalised—are pretty much the same as they were this time last year.

This isn’t to say that a NAMA vehicle shouldn’t have been part of the solution: I advocated prior to Peter Bacon’s report that an asset management agency should be part of a comprehensive solution. At this point, it will be interesting to see in the end how different an outcome we get from the one I proposed last Spring and if it’s not so different, whether the government’s policy in the interim period will be seen as the dithering of officials in denial or an inspired period of delay to allow some breathing space to deal with the problem.

One shift in my thinking since last Spring is that the size of loan losses is now clearly large enough to warrant putting the banks through a resolution process and negotiating with bondholders prior to using state funds to recapitalise. In particular, it is worth noting that the covered banks have about €10 billion in outstanding subordinated bonds (€8 billion of which is accounted for by AIB and BoI).

Without doubt, our usual Bond friendly commenters will tell us that any subordinated bondholders losing money would lead to financial ruination for every Irish man, woman and child. However, given that the European Commission has been taking a hardline stance on the idea of state funds being used to compensate subordinated bondholders (see here and here) it is hard to see how this position can really be justified on practical or moral grounds.

S&P Downgrade Irish Banks Again

Standard and Poor’s have again downgraded the Irish banks. The Irish Times story about this is here. The S&P Press releases are here (need to sign up but it’s free.) The reasons for the downgrade of AIB are summarised as follows:

“The negative outlook reflects our view that the quantum and timing of equity raised through recapitalization may not be sufficient to support an ‘A-‘  rating, combined with our expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment,” said Ms. Curtin.

Negative rating action could occur if we consider that AIB’s recapitalization plans for 2010 are insufficient to adequately recapitalize the bank by our measures or are unlikely to be fully executed in 2010. Negative rating action could also occur if earnings pressures exceed our base-case expectations. The outlook could be revised to stable if there was reduced uncertainty regarding AIB’s ability to restore its capital position to an adequate level in the near term, and greater clarity on the strategic direction of the bank and scope of restructuring.

In relation to Bank of Ireland, the press release states:

“The rating action reflects our opinion of BOI’s prospects in light of our updated view on economic and industry risk in the bank’s core markets, together with our expectations regarding future credit losses,” said Standard & Poor’s credit analyst Giles Edwards.

It also factors in our view of the likely impact of its participation in Ireland’s National Asset Management Agency (NAMA) and associated restructuring and capital raising. We have lowered the ratings due to our view that the environment will remain challenging over the medium term and BOI’s financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and the bank continuing to make losses through 2011. 

S&P’s concerns about future loan losses and capital adequacy of both the major Irish banks are likely to be shared by many potential private equity investors.

Economics Rapping

Denis O’Brien recently seemed annoyed at the sight of academic economists blogging and twittering. I am not sure what he would make of the potential emergence of a new trend, academic economists rapping. The link below is to perhaps the first viral economics rap-song, describing the differences of opinion between Hayekian and Keynesian approaches to recession recovery. One of the authors is Russ Roberts, one of the people behind Econtalk podcasts, which are among the best resources for economics on the web. It is actually quite good but does raise the question of where all this might go. “NAMA: The Musical” would be up there for me.

link here

Water charges good, bilinear taxes bad

The government is still keen on introducing water meters and water charges, as reported in the Irish Times. I agree in principle, but not in detail. I’m glad that the government seems to have abandoned a poll tax. The current announcement, however, foresees a bilinear tax: The first N cubic metres of water are free, the rest is paid for.

Bilinear taxes are rarely optimal. In this case, a substantial share of water is untaxed so that there is no incentive to preserve water below the free allowance.

Much better, therefore, to charge for all water use — and rather than give people a benefit in kind (free water), give those on benefits a “water allowance” and those on wages a “water tax credit”.

Cooper on Implications of Flavin Judgment

I’ve been reluctant to write anything about the DCC\Fyffes\Flavin case (see here and here) despite my suspicion that it represented a very unfortunate precedent in an age in which corporate malfeasance in our leading businesses is a major issue in Irish public life. This is because I can’t claim to have read the 700 page Shipsey report and have a very limited understanding the complex legal issues involved. However, I think that Matt Cooper has done the public an important service in raising the potential implications of the case in this article and I’d be interested in hearing the opinion of some of our more legally-minded commenters as to whether Cooper’s concerns are well-founded.

Shipsey found that Flavin had done no wrong because he had taken legal advice prior to the relevant share dealings. Paul Abbleby of the Office of Director of Corporate Enforcement then concluded “There’s no way that any court would sanction a director for having followed the company’s legal advice.”

Cooper asks “So the question arises: has Shipsey set a precedent that legal advice trumps the law?” and points out how any future businessman wishing to do something illegal now only has to find a lawyer to tell him that what he wants to do is ok.

In relation to the banking crisis, Cooper points out that the defence that people believed they were behaving legally can now come to the aid of those who clearly behaved in an illegal fashion and that a public banking inquiry is likely to be our only chance to see certain individuals called to account for their actions.

As I say, I’m not a legal expert, so I’d like to hear whether those in the know think Cooper has this wrong.

No Explanation for Senior Civil Servant U-Turn

The year’s first week of Dail sittings came and went without much attention being paid to the government’s U-turn on its decision to cut the pay of Assistant Secretaries by 12 percent and the pay of Deputy Secretaries by 15 percent.

The lack of attention to this U-turn—the only cut in the budget that has been rolled back, as far as I know—could reflect a lack of interest from the public, who perhaps think that senior civil servants were being unfairly treated by the budget proposals. Alternatively, the lack of interest may reflect the original timing of the announcement—just before Christmas Eve and three weeks before the next meeting of the Dail, by which time other issues (such as banking inquiries) had arrived along to distract the public.

Credit then, to RTE’s Rachel English for putting a question about this U-turn to junior minister Dara Calleary on her Saturday View program. Mr Calleary’s response was “There’s a U-turn in relation to 160 people whose salaries are benchmarked against a European level unlike most others in the service.” This follows a similar line used by the Minister for Finance. The Irish Times reported:

Mr Lenihan said the pay of workers at this particular grade had been benchmarked against their counterparts in other European countries and they were not paid more than those at equivalent positions.

The benchmarking exercise that Ministers Calleary and Lenihan were referring to (the report of the Review Body on Higher Remuneration in the Public Sector) is here.

It discusses international comparisons and then recommends exactly the type of pay cuts that the government introduced in its budget. So the government’s defense of this U-turn is to use the same report that it used to justify introducing these pay cuts to now justify rolling back the pay cuts. This is hardly a satisfactory explanation.

Guarantee Meetings to Stay Secret

The Sunday Times reports that the Information Commissioner, Emily O’Reilly, has denied their Freedom of Information request to release documents related to two meetings on the night of September 29/30, 2008, one involving senior ministers and officials and another also involving senior banking executives. The paper reports:

In making the decision, she rejected advice from Sean Garvey, a senior investigator in the Office of the Information Commissioner (OIC), who recommended that the documents be released to The Sunday Times under the Freedom of Information (FoI) legislation because of strong “public interest”.


O’Reilly’s decision is a victory for the Department of Finance, which fought a 14-month battle against the release of any documents related to the bank guarantee. It relented and released uncontentious material two weeks ago, but remains opposed to the release of records relating to the guarantee meetings of September 29/30.

The department had warned that it would take High Court action to prevent the release of these records after Garvey recommended their release, with some redactions. Both AIB and Bank of Ireland also opposed their release.

It appears now that we may have to wait until 2038 to see these documents.

Anyone hoping that the banking inquiry will shed light on these meetings is likely to be disappointed. My reading of comments from various government ministers (including the Taoiseach’s interview on RTE’s This Week) is that despite having a terms of reference that includes September 2008, the banking inquiry will not cover the issues related to how the government took the decision to give an almost blanket liability guarantee to the Irish banks.

I was already disappointed that the terms of reference excluded the months after September 2008, when the government consistently put forward a wildly incorrect diagnosis of the scale of the problems in the banking sector (a diagnosis that was shared by its advisers at PWC.) It is even more disappointing to think that perhaps the key policy decision in responding to the crisis will not be open for discussion.

If a major purpose of the banking inquiry is to see that banking crises don’t cost the state a huge amount of money in the future, then to my mind, it needs to come to conclusions not only about how the crisis came about but also about whether the government’s response to it was based on the best information and whether a more informed approach would have saved the taxpayer money.

Academic talent

Peter Sutherland may have been quoted out of context, or inaccurately, in today’s Irish Times, where it is reported that

Yesterday, Mr Sutherland was also critical of Government moves to reduce the pay of university presidents and other senior academics. Mr O’Keeffe has written to university presidents seeking a voluntary pay cut, while the Higher Education Authority has reviewed procedures which allow universities make special payments to its top academics.

Mr Sutherland called for a new flexible approach, “necessary to retain talented but highly mobile staff”.

But presumably the academics here can all agree that in the entire history of higher education, there has never been a recorded case of a talented student saying “I must get my PhD at Harvard, they have a really exciting President”, or “Oxford is the place for me, their Head of Human Resources rocks”, or “what about that VP for Research at Stanford, there’s no other option as far as I’m concerned.”

Academics — even, or perhaps especially, the opinionated ones — make universities what they are. The best students go to places like Harvard because of faculty rosters like this. VPs, Presidents and all the rest are not ‘senior academics’. They are university bureaucrats, or administrators if you prefer. In the Irish context they sometimes come up through the ranks, while sometimes they are hired in from places like the HEA.  I doubt that they are particularly mobile internationally. Paying them enormous salaries strikes me as a waste of money.

If Ireland wants to become a ‘smart economy’ it would be helpful if basic distinctions like this were kept in mind.

Quality of Irish Economics Departments: it’s neither Size nor Youth that counts

Look at http://www.rae.ac.uk/results/qualityProfile.aspx?id=34&type=uoa

These are the economics results for the most recent Research Assessment Exercise for the UK.

The first numeric column reports the number of staff returned in the subject for each institution: UK departments are comparable in size to many Irish ones.  On the same website, one can browse to a narrative for each department: each institution is specifically required to comment on early career researchers.  Like some Irish deparments, many UK departments are also developing new talent.

Now compare their position in the Tilburg ranking https://econtop.uvt.nl/   to Irish departments. 

Everyone still happy?

Depressing State of Irish Economics Departments

Tilburg has produced a ranking of economics departments for the whole world.  See https://econtop.uvt.nl/ .  It is based on journal publications since 2004.  The nice aspect of this website is that you can change the ranking yourself by including the journals that you like and excluding the ones that you despise.  No matter how the cookie is cut, our economics departments are abysmal.